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Tax Reforms in Georgia
April 12, 2011
Country Overview
2
Area 69,700 sq km
Population (beginning of 2009) 4,385.4 thousand
Population (beginning of 2010) 4,436.4 thousand
Birth Rate (per thousand population) in 2009 14.4%
Mortality rate (per thousand population) in 2009 10.6%
Life expectancy* UK 80 years
US 78 years
Georgia 77 years
Romania 74 years
Turkey 72.5 years
Official language Georgian
Literacy 100%Population with at least secondary education (1-12 grades)(%, ages 25 and older) 91%Secondary enrolment ratio 2001-09(% of secondary school-age population) 90%Ratio of Population with higher education(%, ages 25 and older) 29%
Capital city Tbilisi
Currency (code) Lari (GEL)
GDP 2010 (estimate) US$ 11.7 bln
GDP real growth rate 2010 6.4%
GDP per capita 2010 (PPP) US$ 5,057
Headline CPI Inflation 2010 (period average) 7.1%
Non-food CPI Inflation 2010 (period average) 2.7%
US$ - GEL 2010 (period average) 1.78
External Public Debt to GDP 2010** 33.6%* Source: The World Factbook
Source: Geostat, MOF, NBGsy
** Includes exclusive liabilities of NBG to the IMFTax Reforms in Georgia
Reform Driven Economic Success
3
GDP
Components of Nominal GDP* (2010 E)GDP Per Capita – PPP and Nominal
4.05.1
6.47.8
10.2
12.8
10.8
11.7 12.814.6
16.511.1%
5.9%
9.6%
9.4%
12.3%
2.3% -3.8%
6.4%5.5% 5.5% 6.5%
-6%
-3%
0%
3%
6%
9%
12%
15%
-1
1
3
5
7
9
11
13
15
17
2003 2004 2005 2006 2007 2008 2009 2010 Prel 2011F 2012F 2013F
Nominal GDP (US$bln) Real GDP growth, y-o-y (%)
2,9663,242
3,6444,041
4,680 4,907 4,7545,057
5,324
9221,187
1,4781,764
2,315
2,9212,455 2,629
2,973
0
1,000
2,000
3,000
4,000
5,000
6,000
2003 2004 2005 2006 2007 2008 2009 2010E 2011F
US$
GDP per capita (PPP) Nominal GDP per capita Industry 16.9%
Trade 16.6%
Public
Administration
13.0%
Transport &
Communicatio
ns 11.6%
Agriculture
8.4%
Healthcare &
Social
Assistance
5.8%
Construction
5.5%
Education
4.8%
Other 15.7%
* Calculated using nominal GDP (preliminary) at basic prices
Source: Geostat, IMF
Source: Geostat
Source: Geostat
Tax Reforms in Georgia
Reforms - Creation of Favourable Market Environment
Ease of Doing Business, 2011 (WB-IFC Doing Business Report) Economic Freedom Index, 2010 (Heritage Foundation)
145123
8968
6659
6556
5148
5417
128
54
UkraineRussiaSerbia
BelarusMontenegroKazakhstan
TurkeyRomaniaBulgariaArmenia
AzerbaijanEstonia
GEORGIANorway
USAUK
162143
9682
7574
676463
5150
2616
118
UkraineRussia
AzerbaijanKazakhstan
BulgariaItaly
TurkeyFrance
RomaniaHungary
LatviaGEORGIA
EstoniaUK
USAUp from
112 in 2005
TI 2010 Global Corruption Barometer: % addmitting having paid a bribe within the last 12 month
TI 2010 Global Corruption Barometer: % of the surveyed claiming the corruption level has decreased
2%3%3%3%4%5%6%7%8%9%9%
14%14%
26%26%
78%
RomaniaEU+
SpainUnited Kingdom
CanadaItaly
United StatesFrance
LithuaniaLatvia
AustriaCzech Republic
JapanTurkeyPoland
GEORGIA
Georgia ranks 1st in the world in terms of the
(public perception of the) decrease of the level of
corruption
34%33%
28%15%15%
14%13%
9%9%
7%5%5%5%
4%3%
1%
LithuaniaTurkey
RomaniaLatvia
PolandCzech Republic
ItalyJapan
AustriaFrance
EU+Spain
United StatesCanada
GEORGIAUnited Kingdom
4Tax Reforms in Georgia
One of the Best Low-Tax Jurisdictions
„04A „05A „06A „07A ‟08A „09A ‟10A
Number of Taxes
21 7 7 7 6 6 6
VAT 20% 20% 18% 18% 18% 18% 18%
Income Tax12-20%
12% flat
12% flat
12% flat
Social Tax + Income Tax
32% 25%
Social Tax + Income Tax
20%
20%
Social Tax 33% 20% 20% 20% - - -
Corporate Profit Tax
20% 20% 20% 20% 15% 15% 15%
Dividend & Interest
Income Tax
10% 10% 10% 10% 10% 5% 5%
No payroll tax or social insurance tax
No capital gains tax
No wealth tax, inheritance tax or stamp duty
Foreign-source income of individuals fully exempted
Tax rates reduction timetable has been further accelerated in 2008
Note: since 2005 7 taxes were left out of 22 and from 2008 only 6 are imposed
5Tax Reforms in Georgia
Tax Reforms
• Phase I: 2004-2007
– Fight against corruption
– Eliminating red tape
– Deep cut
– Basic institutional changes
• Phase II: 2007-2009
– Improving institutional capacity
– Implementing collection enforcement reforms
– Further reduction of tax burden
• Phase III: 2010-2011
– Deep and comprehensive policy reform
– Finishing customs reforms
– Prioritizing services
– Sharp reduction in tax compliance costs through IT enhancement
6Tax Reforms in Georgia
Tax Reforms Phase 1
•Drastically reduced formal tax burden (elimination of 15 type of taxes, lowering
the rates and leaving them all flat)
•Removing all unnecessary and ineffective intervention from the Government into
private businesses;
•Adoption of simple and fair rules of play and warranty its follow up from every
single entity
•Bringing tax and customs agencies under the ministry of finance
•Phase I resulted into tax collection growth from the budget tax revenues of 12% to
GDP in 2003 to 21.6% to GDP at end of 2007
7Tax Reforms in Georgia
Tax Reforms Phase 2
– Institutional transformation – creation of the Revenue Service
– Upgraded infrastructure – major renovation of the customs checkpoints and tax
service centers
– Setting up comprehensive IT solutions for tax collection – creation of taxpayers
united database (tax+customs), ASYCUDA, etc
– In 2008 corporate income tax reduced from 20% to 15%
– Payroll taxes (PIT and social tax) merged into one and W.A. tax rate reduced
from 27% to 25%
– In 2009 reforms carried out towards reduction of tax burden:
– Income Tax rate reduced from 25% to 20%– Tax rates for dividends and interest payments reduced from 10% to 7.5%– Creation tax free regimes for industrial zones and warehouses
8Tax Reforms in Georgia
Tax Reforms Phase 3
New tax code based on the best international practices;
Introduction of internationally accepted methods and practices;
Introduction of different taxation regimes for taxpayers according to
their needs - SMEs;
Further elimination of bureaucratic barriers;
– Sharp reduction in tax compliance costs through IT
enhancement – www.rs.ge – e-services
– Final shape of Georgian customs – risk based, minimal human
interference, streamlined clearance (10 minutes rule)
9Tax Reforms in Georgia
Effective Management and Improved Administration
10
Before Tax Reform After Tax Reform
Number of taxes 22 6
Potential tax revenue as a percent of GDP
40-45% 28-30%
Actual tax revenue as a percent of GDP
15.6% 23.4%
Compliance Rate 35% 78-85%
Effectively functioning public institutions and rule of law led to a dramatic reduction of informal activities
Note: Compliance Rate (Actual tax revenue/Potencial tax revenue) increased due to Tax Code legislation, improving tax administration and reduced corruption level in tax services, decreased inefficiency.
Tax Reforms in Georgia
Effective Management and Improved Administration
11
At the same time better administration and simplified business regulations provoked rapid growth of tax revenues
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0
1000
2000
3000
4000
5000
6000
7000
Per
cen
t o
f G
DP
GE
L M
illi
on
Nominal tax revenue Tax revenue as a percent of GDP
Tax Reforms in Georgia
Fiscal Challenges
Financial crisis coupled
with Russian
intervention resulted
economic slowdown and
expansion of budget
deficit
Our challenge remains
to shift back the deficit
on sustainable level by
increasing tax base and
moderating expenditure
side
12
-3.0%
-1.5% -1.4%
-1.5%
2.4%
-1.8%
-3.0%
-4.7%
-6.4%
-8.1%
-6.5%
-3.4%
-3.0%
-2.3%-1.8%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Per
cen
t o
f G
DP
Conventional deficit (cash)
Tax Reforms in Georgia
Composition of Tax Revenues Year 2010
13
25%
12%
45%
12%1% 4%
Personal income tax
profit tax
VAT
Excise
Import Tax
Property tax
Tax Reforms in Georgia
Recent Innovations for Taxpayers
• Electronic Filing System implemented in 2008 and significantly
improved in 2009
• All declarations and invoices are available in electronic form
• Registration in the system is based on taxpayer's request
14Tax Reforms in Georgia
Tax Administration
Compliance Facilitation and Services
e-filing: Number of Registered Users
Monthly Declaration Statistics
e-filing vs. hard copy declarations
Robust e-filing and e-payment systems Unified Cards for Customs and Tax Liabilities Princple of “Good Faith” Special Treatment of Micro and Small businesses Electronic VAT Invoices Electronic Administration System
• Risk Based Selection of Taxpayers for Control• Electronic Assignments for Tax Officers• Electronic Performance Monitoring
Risk Based Tax Audit Advance Ruling Accelerated Services Personal Tax Agent
0
50000
100000
150000
200000
250000
Nov
-09
Dec
-09
Jan
-10
Feb
-10
Mar
-10
Ap
r-10
May
…
Jun
-10
Jul-
10
Au
g-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan
-11
Feb
-11
Number of e-filings Number of hard copy declarations
0
50,000
100,000
150,000
Nov
-09
Dec
-09
Jan
-10
Feb
-10
Mar
-10
Ap
r-10
May
-10
Jun
-10
Jul-
10
Au
g-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan
-11
Feb
-11
Number of Registered Users
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
0
50,000
100,000
150,000
200,000
250,000
300,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Electronic Paper based
% of Electronic % of Paper based 15Tax Reforms in Georgia
Purpose of the New Tax Code
The new tax legislation will simplify Doing Business in a following ways:
• Increase public trust towards Tax System;
• Formation of Stable and Sustainable Tax environment;
• Encouraging business legalization;
• Simplification of legal Provisions – Removing ambiguities;
• Reduction of Tax Compliance burden – Simplification of Tax
Administration;
• Evenly distribution of tax burden;
• Using the best international tax practices, EU directives.
16Tax Reforms in Georgia
Unification of tax and customs codes
• Incorporated Tax and Customs Code unifies taxpayers tax and customs
assets/liabilities, by which companies can transfer excess amount available on
tax card to cover customs liability and contrary;
• Incorporated Tax and Customs Code will be more Systematic & User-Friendly
― Simplified Reporting Procedures, especially by E-filing― Consolidated Tax Profile for Customs & Tax Issues― Less Bureaucratic System to Navigate― More Fair Regulation Implemented― Quicker Resolution to Administrative Issues― Easy Resolution to Overpayments― More Flexibility in Managing Liabilities and Cash Flows― Reduces Administrative Burden of Compliance― Reduce Taxable Income & Pay less Taxes
17Tax Reforms in Georgia
Customs Clearance Zone (GEZI )
• Customs Clearance Zone (GEZI) is a large clearance centre - unprecedented for
Georgia, covering several hectares with special parking area for hundreds of trucks.
• It‟s possible to serve simultaneously an unlimited number of importers within an
hour instead of days 24 hours in a week.
• For clearance of the goods the importer will not have to hire a broker,
agent/declarant or other intermediary and incur high costs for their service.
• It is possible to postpone the service fee payment for 5 days upon clearance of the
goods in the customs clearance zones. The fees have been halved in comparison to
existing ones.
18Tax Reforms in Georgia
Customs Risk Management
• New system of declared goods’ checks implies risk-based customs control mechanism which greatly diminishes time needed for customs clearance of cargo.
• There were higher chances of corruption before as 100% of goods were physically examined by a customs officer.
• Now the customs risk management software decides which goods have to be checked based on predetermined selection criteria. Therefore, importers need only 1 hour to go through all customs clearance procedures.
• Customs risk management system eliminates any chance of concluding deals between a customs officer and an importer and this is an effective mechanism against corruption. It also saves administrative resources.
• Goods go through 4 different color corridors (program uses 4 colors: blue, green, red and yellow for different types of customs control) – almost the same approach is used for human movement.
• There are several risk profiles in the system in order to prevent import of non-declared goods, manipulation with HS codes and to protect intellectual property rights.
• Under Customs Risk management system it is possible to offer simplified customs clearance procedures to organizations associated with low customs risk such as government agencies and diplomatic organizations.
19Tax Reforms in Georgia
Color corridors selected by customs risk management software
Meanings of Color Corridors
Export
Import
Warehouse
Green corridor - Immediate release without examination
Yellow corridor - Documentary check
Red corridor - Physical examination on of goods and
documents
Blue corridor - Examination at a later stage (post audit)
0%
10%
20%
30%
40%
39%
24%
33%
4%
Relevant color corridors selected by customs risk management Software for each customs regime(1st quarter of 2011 )
0%
15%
30%
45%
60%
60%
5%
34%
2%
0%
20%
40%
60%
80%
9%0%
78%
13%
20Tax Reforms in Georgia
Informational Technology Zones
• Persons involved in IT activities have a right to apply for the status which will be awarded in no later than 10 business days in case certain requirements are met.
• Tax benefits apply to the Provision of Services outside of Georgia by a person of the virtual zone who is exempt from:
corporate profit tax
VAT
export duties
• Application for a status of a IT zone person must be submitted electronically at vz.mof.ge
21Tax Reforms in Georgia
Free Industrial Zones
• Free Industrial Zones is an unique opportunity for businesses to process, produce and export goods with a minimum tax burden.
Benefits include:
• exemption from corporate income tax, interests and dividends withholding taxes, VAT on exports, property tax and some other tax benefits
• With Georgian Free Trade Agreements, one can export goods free of trade barriers to global markets consisting of more than 350 million consumers;
• From Georgia to EU markets one can export more than 7,200 goods free of any trade barriers under the GSP+ (Globalized System of Preferences) arrangements.
• Two Free Industrial Zones have already been established in Georgia – Kutaisi Poti Free Industrial Zones
22Tax Reforms in Georgia
Free Warehouse Company
• The Free Warehouse Company, from a taxation perspective, is designed as an integral logistical unit for international transit companies.
• This Free Warehouse Enterprise categorization can be effectively used by international cargo companies, regional large network distributors and any company desiring to transport goods between Central Asia and global markets in the fastest and least costly manner possible.
Tax Benefits include:
• Exemption from corporate income tax applied to income received from re-exporting goods from free warehouses via the Free Warehouse Company;
• Exemption from VAT on the supply of goods by a Free Warehouse Company to a VAT payer in a free warehouse.
23Tax Reforms in Georgia
International Financial Company
• Companies can improve their tax effectiveness by obtaining the special status of an international financial company.
• International Financial Company is a financial institution carries out most of its services with parties outside of Georgia and its activities are tax exempt.
• Companies involved in providing financial services such as Wealth management, Asset management, Financial intermediation and other similar activities can effectively use the status and privileges of an International Financial Company.
Corporate income tax exemptions apply to:
• Profits received from financial services provided by an International Financial Company;
• Gains from sale of securities issued by an International Financial Company
• Dividends paid by an International Financial Company.
24Tax Reforms in Georgia
ADVANCE RULINGS
Tax authority issues 2 types of advance rulings:
Advance private rulings
– An advance tax ruling is a written statement given by the Tax authority to a taxpayer
stating how it will interpret and apply specific provisions of tax law to a definite
transactions the taxpayer is contemplating
– An advance tax ruling is binding upon the Tax Authority. This means that if the
transaction was carried out substantially as set out in the request, taxpayer will not be
subject to any additional tax or sanctions.
Public tax rulings
– In case of decision of tax appeals council and other relevant administrative body which changes
and/or establishes tax practice different from existing one, the Ministry of Finance is obliged to
issue relevant legislator interpretation act – Public Tax Ruling
25Tax Reforms in Georgia
Contribution of SME and large businesses to tax revenues
26
Large Business
Medium Business
Small Business
>1%
5-25%
70-95%
70+%
10-25%
0-10%
Share of Registered Taxpayers Share in Tax Revenues
Tax Reforms in Georgia
Micro Business
Micro business - entity with income less than to GEL 30,000
Micro Business is exempted against any tax
Expected results:
Employment
Reduction of poverty through self-employment
Full legalization of business
27Tax Reforms in Georgia
Small Business
Small business - Entity with income less than GEL 100,000
Taxation Procedures:
• Will be taxed with one single tax;
• Tax rate of 3% or 5% of income;
• In case of 5% Tax Rate - runs only simple "purchases and sales journal"
and cash registers;
• In case of 3% Tax Rate – entity must provide invoices for at least 60% of
its income.
• Removing requirements of book keeping in conformity with
international standards.
28Tax Reforms in Georgia
Advance tax ruling
Advance Tax Ruling
• Important mechanism in the world tax system in order to increase taxpayer's procedures efficiencyand comfort;
• Person, who acts according with advance tax ruling, the Georgian Tax Authority may not be imposedtaxes or tax sanctions.
• An application to request an advance ruling must be in written form. The tax authority has the right torequest the submission of additional documents. As a rule, the tax authority is obliged to issue anadvance ruling within 60 days of receipt of the application.
Advantages
• Taxpayer is given the opportunity to take a preliminary decision from the Tax Authority of future
reports on the basic financial operations and structuring;
• Encouraging local entrepreneurs and foreign investors;
• Simplify relationship between businesses and tax authorities.
29Tax Reforms in Georgia
International practice of advance tax ruling
30
• Procedure was imposed in various countries
on different steps of development;
• ATR has similar principles in all economies,
excluding price and time limits;
• The focal objective of ATR is to establish
close contacts between the taxpayer and tax
authority in order to better fulfill all the tax
procedures;
• Nowadays, ATR is used in more then 40
Countries.
Tax Reforms in Georgia
International Taxation
31
• DTAs help to widen Georgia‟s economicspace and strengthen its position as a hubfor business.
• The main objective of a DTA is tominimize tax barriers to the flows of tradeand investment between two treatycountries.
• The number of DTAs were doubled in2009-2010.
0
5
10
15
20
25
30
35
1995-2000 2001-2005 2006-2010
Statistic of DTA's in Force
Tax Reforms in Georgia
International Taxation
Georgian draft of the “Agreement for the Avoidance of Double Taxation on Income and on
Capital” is based on 2008 OECD Model Tax Convention on Income and on Capital.
“Double Taxation Agreement” between Georgia and another country serves to prevent
double taxation of income earned in one country by a resident of the other country. It also
makes clear the taxing rights between Georgia and its treaty partner on different types of
income arising from cross-border economic activities between the two countries.
The main principle of Georgian DTAs is taxation based on residency – person shall be
taxable in a country of residence on its worldwide income.
If certain types of income are taxed in a country of source, Georgia gives tax credit to
eliminate double taxation.
32Tax Reforms in Georgia
International Taxation
Georgian draft of the “Double Taxation Agreement” includes different provisions of 2008
OECD Model Tax Convention. Dividends and interest must be taxable according to
residency.
For instance, if Georgia‟s resident company receives dividends from Singapore's resident
company, it will be taxable only in Georgia.
According to new changes introduced in Georgian tax code in 2009, withholding tax rates of
dividends and interest are 5%. These incentives encourage to flow investment and to
improve business climate in Georgia.
33Tax Reforms in Georgia
Agreements for the Avoidance of Double Taxation
Currently Georgia has 30 active Double Taxation Agreements with major trade partner:
34
E U R O P E A N U N I O N O T H E R S T A T E S
Austria
Belgium
Bulgaria
United Kingdom
Germany
Denmark
Estonia
Ireland
Italy
Latvia
Azerbaijan
Turkey
Turkmenistan
Iran
Singapore
Armenia
Uzbekistan
Ukraine
China
Kazakhstan
Lithuania
Luxembourg
Malta
Czech Republic
Netherlands
Poland
Romania
Greece
France
Finland
Tax Reforms in Georgia
Double Tax Treaty Withholding Tax Rates
35
E U R O P E A N U N I O N
Country Permanent
EstablishmentDividends Interest Royalties
Austria 6 month 0% / 5% 0% 0%
Belgium 9 month 5% 5% 5% / 10%
Bulgaria 9 month 5% 5% 10%
United Kingdom 6 month 0% / 5% 0% 0%
Germany 6 month 0% / 5% 0% 0%
Denmark 6 month 0% / 5% 0% 0%
Estonia 9 month 5% 5% 10%
Italy 6 month 5% 0% 0%
Ireland 6 month 0% / 5% 0% 0%
Lithuania 9 month 5% 5% 10%
Latvia 6 month 5% 5% 10%
Luxembourg 6 month 0% / 5% 0% 0%
Malta 6 month 0% 0% 0%
Netherlands 6 month 0% / 5% 0% 0%
Poland 6 month 5% 5% 10%
Romania 9 month 5% 5% 5%
Greece 9 month 5% 5% 5%
France 24 month 5% 0% / 5% 0%
Finland 6 month 0% / 5% 0% 0%
Czech Republic 6 month 5% 5% 0% /5%10
O T H E R S T A T E S
Country Permanent
EstablishmentDividends Interest Royalties
Azerbaijan 6 month 5% 5% 10%
Turkey 12 month
5% 5% 10%
Turkmenistan 6 month 5% 5% 10%
Iran 12 month 5% 5% 5%
Singapore 6 month 0% 0% 0%
Armenia 6 month 5% 5% 5%
Uzbekistan 6 month 5% 5% 10%
Ukraine 12 month 5% 5% 10%
Kazakhstan 6 month 5% 5% 10%
China 6 month 0% / 5% 5% 5%
Tax Reforms in Georgia
Global Forum on Transparency and Exchange of Information for Tax Purposes
In the first half of 2011 Georgia willbecome a member of Global Forum onTransparency and Exchange ofInformation for Tax Purposes. 98States are the Members of GlobalForum, including all OECD countriesand all G20 countries.
The main objectives of the GlobalForum are:
1) to ensure that all its members areon an equal footing; and
2) will fully implement the standardsof exchange of information they havecommitted to implement.
36Tax Reforms in Georgia
One of the Best Performer by Forbes Tax Misery & Reform Index
According to 2009 Tax Misery & Reform Index, release by Forbes Business & Financial News, Georgiais the fourth least tax burden country after Qatar, UAE and Hong Kong
Since 1
January 2009,
income tax
declined to
20% from 25%
37Tax Reforms in Georgia
Contacts
38
Rusudan Kemularia
Deputy Minister of Finance of Georgia
+995 32 262406
Tax Reforms in Georgia